Question

Southwestern Wear Inc. has the following balance sheet:

Current assets	$1,875,000		Accounts payable	$375,000
Fixed assets	1,875,000		Notes payable	750,000
			Subordinated debentures	750,000
			Total debt	$1,875,000
			Common equity	1,875,000
Total assets	$3,750,000		Total liabilities and equity	$3,750,000

The trustee's costs total $323,500, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $4 million is received from sale of the assets?

Distribution of proceeds on liquidation:

1. Proceeds from sale of assets	$ ___
2. First mortgage, paid from sale of assets	$ ___
3. Fees and expenses of administration of bankruptcy	$ ___
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition	$ ___
5. Taxes	$ ___
6. Unfunded pension liabilities	$ ___
7. Available to general creditors	$ ___

Distribution to general creditors:

Claims of General Creditors	Claim (1)	Application of 100% Distribution (2)	After Subordination Adjustment (3)	Percentage of Original Claims Received (4)
Notes payable	$ ___	$ ___	$ ___	%___
Accounts payable	$___	$ ___	$ ___	%___
Subordinated debentures	$ ___	$ ___	$ ___	%___
Total	$ ___	$ ___	$ ___

The remaining $______ will go to the common stockholders.

Answer 1

Proceeds from sale of assets	40,00,000
First mortgage, paid from sale of assets	-
Fess and expenses	(323,500)
Wages due	-
Taxes	-
Unfunded pension liabilities	-
Available to general creditors	3,676,500

It has no first mortgage, wages or taxes due so only fees and expenses will be reimbursed in the priority claims. That will leave 4,000,000 - 323,500 = 3,676,500 for general creditors.

Claim of general creditors	Claim (1)	Application of 100% distribution (2)	After subordination adjustment (3)	%age of original claims received (4)
Notes payable	750,000	750,000	750,000	100.00%
A/C payable	375,000	375,000	375,000	100.00%
Subordinated debentures	750,000	750,000	750,000	100.00%
Total	1,875,000

The total claims for general creditors is less than the amount left over for general creditors so each of them will get the full amount. That will leave 3,676,500 - 1,875,000 = 1,801,500 for the common stockholders.